South Korea emerged from forty years of nationalist, projectionist policy to become the world's 13th largest economy and 11th largest trading partner. A leading industrial force, South Korea has experienced an average annual GDP growth rate of approximately 8.7 percent resulting in a dramatic increase in the standard of living and the gradual rise of a substantial middle class. South Korea's drastic ascension was based on economic policy marked by heavy government intervention, protectionism, and a lack of interest in opening up industrial sectors to foreign firms. The main tools the government used to ensure such policies were trade barriers, excessive export subsidies, and other industrial policies.
The momentum of South Korea's economic progression has been stifled recently by an economic slowdown. High interest rates and excessive labor costs are two of the symptoms of economic downturn the country faces. Currently, 30 of the Republic's top businesses have frozen 1997 wage levels. In addition, foreign debt was estimated at $93 billion in 1996. Contributing to the slowdown in the market are the "growing pains," or the intense heightening of domestic demand which have produced a dramatic rise in imports.
An issue that has surged to the forefront of economic policy and financial institutions has been how to confront the costs of rapid development. By containing the current market structure, South Korea is only adding fuel to the fire. The nation's industries must look beyond its borders, expanding businesses across the globe. To understand the magnitude of South Korea's financial undertaking, it is useful to discuss the problems plaguing the current management structure, the specific steps toward reform, and the impact of potential reunification with North Korea.
South Korea's road to an open market will not be fully realized unless current management is rid of the corruption and collusion that plagues industries still. More specifically the role of the chaebol must be weakened. Those who know South Korea well indicate that one of the keys to successfully competing in there is understanding the chaebol. The chaebol is composed of elite families who have historically maintained complete control over the business conglomerates including Hyundai and Daewoo. The chaebol leaders have been known to persuade government officials with favors to create and promote economic policies to their benefit. Known as "rice-cake money," it is easily shuffled through a maze of cross-shareholdings. Viewed as the dark side of Korean business, the actions of the chaebol were only recently confronted due to the realization that as long as these favors exist government controls on big business can not be lifted. President Kim Young Sam has already taken drastic measures by jailing several key members of the country's elite for amassing more than $500 million in bribes. Now drastic measures are being taken to hire professional managers who will answer to company shareholders. Until the policies of the government are free from contamination, complete open markets will remain unattainable.
South Korea recognizes that now is a crucial time to address these internal challenges of economic development and the construction of democratic political institutions. Currently, there are three major reform movements sweeping the nation. These include the Segyehwa Program, the promotion of the high value-added strategic sector, and membership in the OECD.
In 1993, President Kim Young Sam initiated the Segyehwa Program which, if executed to the fullest extent, will render the economy fully open to international business and investment. The dynamics of the program encompass education, administration, cultural awareness, and foreign relations. Since 1993, 1,900 regulations have undergone revisions and Kim is anxious for more to follow. Five primary interdependent issues make up the bulk of the program.
First, the program calls for a dramatic shift in business from high cost, low efficiency operations to low cost, high efficiency operations. Prime minister of finance, Han Seung-Soo has declared that the government lower interest rates, the cost of land, and wage increases, which are the highest in the world averaging 20 percent a year in the early 1990's. The second focus of Segyehwa deals with decreasing the role of government and relaxing strict regulations that have kept the South Korean market closed. Deregulation has already begun in investments. Policies granting foreign firms access to takeover investment trust firms will be effective as early as December 1997. Starting in December of 1998, foreign firms will also gain access to security houses and investment consulting firms.
The third feature to the Segyehwa Program is the opening of the Korean Market internationally. A landmark step to this goal, the EU-Korea Framework Agreement, fosters an improved climate for bilateral trade and investment, and addresses topics currently at issue between the two entities.
Finally the last two issues intermixed in the Segyehwa portfolio deal with establishing new and stronger relations between large firms and small/medium firms, and promoting a "National Morality." Opening markets and heightening competition will mean that cooperation between large and small industry participants is essential to strengthen the nations competitiveness. Small and Medium sized firms should focus on specialized or high-tech areas while larger firms offer support by establishing channels worldwide. The latter of these two policies of Segyehwa includes the encouragement of productive labor, creative entreprenuership and increasing the focus of human resources in the education and training system.
A second trend in South Korea is the transformation of the Korean financial industry into a high value-added strategic sector. The Korean financial industry unveiled its plan on May 20, 1996, outlining the 5 year plan which will boost the industry to a universal system by 2001. The main idea is to combine the banking, securities, and insurance industry, making each a "financial supermarket" of sorts which will give more services under one roof and provide better customer information. Elimination of preferential policy based loans and active encouragement of acquisitions and mergers are aims hoping to be met before the year 2000.
Specifically, banks will handle loans, debts, and corporate securities. In 1997, this list will include underwriting corporate bonds to security companies and the development of financial products in combination with insurance and security companies. Security firms join an inter-bank on-line electronic network and will witness the expansion of the scope of foreign exchange services. Finally, insurance agencies will be able to underwrite national and public bonds, as well as handle real estate, and establish subsidiaries. By the year 2000 a massive computer system linking all three industries will have been developed and installed.
South Korea is currently making progress toward its bid to join the OECD. While an unofficial member, admission is viewed as probable sometime in 1996. Belonging to the OECD is viewed by many as a catalyst for restructuring the economy. President Kim Young Sam actively supports this measure which promotes a shift from state guided capitalism to an open economy. The Federation of Korean Industries has declared that joining the alliance of the world's wealthiest nations will bring about the biggest change in the economy since the founding of the nation. Estimates show that membership would result in foreign investors owning 10 percent of equity by the year 2000 (currently they own 4 percent). Membership also includes government plans to relax rules on borrowings by firms with foreign equity and regulations on friendly company takeover attempts.
The National Congress for New Politics opposes joining the OECD claiming Korea's interest is sparked by outside pressure by foreign firms for market access. The party believes that government led industrial policy proved highly effective, catapulting the nation from among the region's poorest to one of the richest in a mere four decades. They see foreign intervention in markets as a threat to jobs. Specifically, the farming industry will crumble under cheap imports and medium sized business will be prime takeover possibilities.
South Korea's evaluation of it's current economic position and open market policy must consider relations with North Korea. The possibility of reunification and the economic implications surrounding this phenomena must be addressed if South Korea is to successfully expand into the 21st Century. North and South Koreans share the same language, culture, and Confucian traditions. Thus the political and economic ideologies which divide them are marked with bitter emotion making the issue a highly sensitive one for policy makers and economists to effectively address. In April of 1997, the US, South Korea, and China propose to start talks on a peace treaty to replace the vague and uneasy truce that has lingered since 1953. The overriding feeling among South Koreans is that they want reunification providing that capitalism and democracy be maintained.
North Korea has permitted a few South Korean firms to run assembly lines in the North, yet for the executives in charge of operations, it remains extremely difficult to visit these facilities. In terms of actual cost, reunification is a notion that is alarming to say the least. The South Korean Defense Ministry claims that as time progresses, the poorer state of the North Korean industry will be more costly to reconstruct. The most optimistic estimate of direct costs is $700 billion, mainly in infrastructure. The highest estimates have peaked at $2 trillion. Thus south Korea's concerns center around its own capabilities for absorbing such exorbitant costs while maintaining intentions to achieve OECD Membership.
The dominant theme in South Korea's recent economic developments has been the surge to open markets to international opportunities. If South Korea attains its goals, the Korean economy is projected to reach seventh place by 2020 with a GDP of 4 trillion and a trade surplus of 2.4 billion, along with the status of a G-7 ranking. Thus, now is a time of optimism among South Koreans who see the financial possibilities of their nation as a distinct reality.
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